11 search hits

We present a tractable model of the effects of nonfinancial risk on intertemporal choice. Our purpose is to provide a simple framework that can be adopted in fields like representative-agent macroeconomics, corporate finance, or political economy, where most modelers have chosen not to incorporate serious nonfinancial risk because available methods were too complex to yield transparent insights. Our model produces an intuitive analytical formula for target assets, and we show how to analyze transition dynamics using a familiar Ramsey-style phase diagram. Despite its starkness, our model captures most of the key implications of nonfinancial risk for intertemporal choice.

We model the motives for residents of a country to hold foreign assets, including the precautionary motive that has been omitted from much previous literature as intractable. Our model captures many of the principal insights from the existing specialized literature on the precautionary motive, deriving a convenient formula for the economy’s target value of assets. The target is the level of assets that balances impatience, prudence, risk, intertemporal substitution, and the rate of return. We use the model to shed light on two topical questions: The “upstream” flows of capital from developing countries to advanced countries, and the long-run impact of resorbing global financial imbalances

We argue that the U.S. personal saving rate’s long stability (1960s–1980s), subsequent steady decline (1980s–2007), and recent substantial rise (2008–2011) can be interpreted using a parsimonious ‘buffer stock’ model of consumption in the presence of labor income uncertainty and credit constraints. Saving in the model is affected by the gap between ‘target’ and actual wealth, with the target determined by credit conditions and uncertainty. An estimated structural version of the model suggests that increased credit availability accounts for most of the long-term saving decline, while fluctuations in wealth and uncertainty capture the bulk of the business-cycle variation.

This paper presents a simple new method for estimating the size of ‘wealth effects’ on aggregate consumption. The method exploits the well-documented sluggishness of consumption growth (often interpreted as ‘habits’ in the asset pricing literature) to distinguish between short-run and long-run wealth effects. In U.S. data, we estimate that the immediate (next-quarter) marginal propensity to consume from a $1 change in housing wealth is about 2 cents, with a final long-run effect around 9 cents. Consistent with several recent studies, we find a housing wealth effect that is substantially larger than the stock wealth effect. We believe that our approach is preferable to the currently popular cointegrationbased estimation methods, because neither theory nor evidence justifies faith in the existence of a stable cointegrating vector. JEL Classification: E21, E32, C22

We estimate the degree of 'stickiness' in aggregate consumption growth (sometimes interpreted as reflecting consumption habits) for thirteen advanced economies. We find that, after controlling for measurement error, consumption growth has a high degree of autocorrelation, with a stickiness parameter of about 0.7 on average across countries. The sticky-consumption-growth model outperforms the random walk model of Hall (1978), and typically fits the data better than the popular Campbell and Mankiw (1989) model. In several countries, the sticky-consumption-growth and Campbell-Mankiw models work about equally well.

The budget constraint requires that, eventually, consumption must adjust fully to any permanent shock to income. Intuition suggests that, knowing this, optimizing agents will fully adjust their spending immediately upon experiencing a permanent shock. However, this paper shows that if consumers are impatient and are subject to transitory as well as permanent shocks, the optimal marginal propensity to consume out of permanent shocks (the MPCP) is strictly less than 1, because buffer stock savers have a target wealth-to-permanent-income ratio; a positive shock to permanent income moves the ratio below its target, temporarily boosting saving. Keywords: Risk, Uncertainty, Consumption, Precautionary Saving, Buffer Stock Saving, Permanent Income Hypothesis.

The Great Recession confirmed a bedrock principle of modern consumption theory: It is impossible to explain aggregate spending behavior without knowledge of the underlying microeconomic distribution of circumstances and choices across households. National accounting frameworks therefore need to be augmented by “bottom up” measures that both (a) capture the microeconomic heterogeneity (in expenditures, income, assets, debt, and beliefs) in the population and (b) sum up to statistics that have a recognizable relationship to the aggregate totals that are already reasonably well measured.

American households have received a triple dose of bad news since the beginning of the current recession: The greatest collapse in asset values since the Great Depression, a sharp tightening in credit availability, and a large increase in unemployment risk. We present measures of the size of these shocks and discuss what a benchmark theory says about their immediate and ultimate consequences. We then provide a forecast based on a simple empirical model that captures the effects of wealth shocks and unemployment fears. Our short-term forecast calls for somewhat weaker spending, and somewhat higher saving rates, than the Consensus survey of macroeconomic forecasters. Over the longer term, our best guess is that the personal saving rate will eventually approach the levels that preceded period of financial liberalization that began in the late 1970s. Classification: C61, D11, E24

This paper explains why the collection of panel (reinterview) data on a comprehensive measure of household expenditures is of great value both for measuring budget shares (the core mission of a Consumer Expenditure survey) and for the most important research and public policy uses to which CE data can be applied, including construction of spending-based measures of poverty and inequality and estimating the effects of fiscal policy.